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Study: Number One Reason for Sale of High-Worth Businesses? Potential Tax Increases

The third quarter Market Pulse Survey Report by the International
Business Brokers Association (IBBA), M&A Source, and Pepperdine
University's Graziadio School of Business and Management found that for
businesses valued at $5 million and above, potential tax increases is
the primary driver motivating a sale. Retirement was the number one
reason for sales across all businesses valued under $5 million. The
second most common reason was burnout and third was “new opportunities.”

The third quarter Market
Pulse Survey Report (http://bschool.pepperdine.edu/privatecapital)
shows that the threat of the election, fiscal cliff and possible tax
increases next year is taking a toll on the M&A market. The majority
(57%) of respondents expected fewer sellers would go to market until
they had better clarity on the future. A quarter (26%) of respondents
said that they thought more sellers would try to close a deal before the
new taxes take effect.

“Baby boomers represent more than half of the business owners in the
U.S. and many are selling their businesses in order to have a
comfortable retirement,” said Chet Walden (Atlanta, GA), president of
M&A Source. “Businesses over $5 million in value had more money to lose
and were more keenly aware of the large potential tax increases coming
in 2013. They decided to sell in 2012 in hopes of netting out more than
they could after the new taxes take effect.”

“For those businesses waiting to sell, I think it's safe to assume that
many are waiting to move 2009 off their three-year-trailing financial
reports,” said Dr. John Paglia, director of the Pepperdine Private
Capital Markets Project and associate professor of finance at Pepperdine
University's Graziadio School of Business and Management. “Most sellers
had a poor financial performance in 2009, and moving past that may make
their businesses more sellable. They're hopeful that better numbers will
net them a little better value—even with the tax implications in
consideration.”

Compared to the second quarter of 2012, Main Street Market brokers were
less likely to describe conditions as a “buyer's market.” As the deal
size increased, advisors were progressively more inclined to describe
conditions as a “seller's market.” In the lower middle market, advisors
described it as a “seller's market” by a 2 to 1 ratio for deals of $5
million and above (41% seller's versus 20% buyer's).

“The shift from a buyer's market to a seller's market reflects the
number of buyers coming into the marketplace,” said Scott Bushkie (Green
Bay, WI), Marketing Chair for IBBA. “Economic uncertainty and the
looming fiscal cliff may have resulted in fewer sellers, giving the
upper hand to the business owners that are looking to sell their
companies now. It is Econ 101: more buyers (with unprecedented amounts
of cash) than sellers, sellers have the advantage.”

Other key findings:

Survey results showed a fairly significant increase in cash at close.
For Q2, cash at close accounted for roughly 50% of deal financing
across most sectors. For Q3, cash at close was at approximately 70-75%
across all but the $5 million-plus deals.

Private equity purchases were almost nonexistent until opportunities
reached $5 million in value. In this study, private equity dominated
purchases of $5 million and above, at 68% of deals closed. Of those,
nearly all were add-on acquisitions with one private equity platform
deal.

For Main Street businesses, buyers were primarily individuals (75%).
Of those individual buyers, more than half (60%) were first time
buyers.

New in the Q3 survey, brokers and intermediaries were asked where
buyers were located in relation to the businesses sold. Notably, deals
over $5 million in value garnered the largest percentage (88%) of out
of state buyers.

Local buyers within a 20 mile radius were the most common buyer group
until deals exceeded $5 million in value. Less than 10% of businesses
in all sectors were sold to an international buyer.

The International Business Brokers Association (IBBA) and M&A Source, in
partnership with Pepperdine Private Capital Markets Project, have set a
goal to provide quality information on a quarterly basis in order to
become the go-to source for Main Street and lower middle market
transactions. The “Market Pulse Quarterly Report” gives business owners
and their advisors access to current market conditions and trends
regarding business sales across the country to help them make
well-informed decisions regarding selling their business. It also gives
business brokers and intermediaries timely and accurate data to help
them build and maintain a successful and sustainable business.

About the Graziadio School of Business and Management

Founded on the core values of integrity, stewardship, courage, and
compassion, Pepperdine University's Graziadio School of Business and
Management has been developing values-centered leaders who advance
responsible business practice since 1969. Student-focused,
experience-driven and globally oriented, the Graziadio School offers
fully accredited MBA, Masters of Science, bachelor's completion and
non-degree executive business programs for business professionals,
entrepreneurs, managers and senior executives at all stages of their
professional and personal development. More information: http://bschool.pepperdine.edu/newsroom

About International Business Brokers Association (IBBA) and the M&A
Source

Founded in 1983, IBBA is the largest non-profit association specifically
formed to meet the needs of people and firms engaged in various aspects
of business brokerage, and mergers and acquisitions. The IBBA is a trade
association of business brokers providing education, conferences,
professional designations and networking opportunities. For more
information about IBBA, visit the website at www.ibba.org.

Founded in 1991, the M&A Source promotes professional development of
merger and acquisition professionals so that they may better serve their
clients' needs, and maximize public awareness of professional
intermediary services available for middle market merger and acquisition
transactions. For more information about the M&A Source, visit the
website at www.masource.org.

Pepperdine University's Graziadio School of Business and ManagementDouglass
Gore, Director of Public Relations310-568-5580graziadioPR@pepperdine.edu